We know there is nothing worse than looking at a home, falling in love with it and then finding out that you can't qualify for it! Fortunately, there are a few tools that your mortgage lender can use to help find out 'how much home you can afford;' two such tools are the mortgage pre-qualification and mortgage pre-approval process.
Many buyers are under the impression that if a lender "pre-qualifies" them for a mortgage that this also must mean that they have been "approved" for a home loan. Unfortunately, there's a world of difference between a borrower who is pre-qualified versus one who is pre-approved for a home loan. If you've ever been confused by the two terms, we'll bring you up to speed on how these terms differ, the options both can offer, and which option is more appealing when negotiating with sellers.
What is Mortgage Pre-Qualification?
Some mortgage lenders use mortgage pre-qualification as the initial step in the mortgage process- and it's generally a fairly simple process. You, the borrower, supply a mortgage lender with a general overall financial picture, including your debt, income, assets, and what you think your credit score is.
After you supply that criteria, a mortgage agent will have a better idea of the mortgage amount for which you might qualify. Getting pre-qualified with a mortgage lender can be done face-to-face, over the phone, or on the Internet. Typically, there is no-cost or obligation involved from the borrower, either.
The initial pre-qualification step also allows you to discuss with your mortgage lender any goals or needs you may have regarding your mortgage. This will help your mortgage agent determine the best loan options suited to your individual situation. A typical loan pre-qualification does not include an analysis of your credit report (hard credit pull) or an in-depth look at your ability to purchase a home.
Because mortgage pre-qualification is a quick procedure, and based only on the information the borrower provides the mortgage agent, a pre-qualified amount is not a sure thing; it's just the dollar amount for which a borrower 'might' expect to be approved for. For this reason, a pre-qualified buyer doesn't carry the same weight as a pre-approved buyer who has been more thoroughly investigated with credit, income, debt and assets.
What is a Mortgage Pre-Approval?
As you might expect, the mortgage pre-approval process is a much more formal and involved process. During this phase, prospective borrowers will complete an official mortgage application. Then the borrower will supply the lender with all the necessary documentation to perform an extensive check on the borrower's financial background and current credit rating.
Below, is a short list of commonly requested documents that a mortgage agent would need in order to complete a mortgage pre-approval. Other documents may be necessary, depending on the borrower's history and/or financial profile.
Items Needed for a Typical Mortgage Pre-Approval
Pay stubs (covering one full month)
Federal Tax Returns (for the last two (2) years)
Bank Statements (for the most recent two (2) months)
Assets (Such as 401(k) Statements, Annuities, Stocks)
Home & Work History (for the last 2 years)
Copy of a Sales Contract (if a home has already been found)
Once the borrower's income, credit profile, and the required documents have thoroughly and successfully reviewed by the mortgage agent, the agent will have the ability issue what's referred to as a 'mortgage pre-approval letter.' The pre-approval letter is a conditional commitment, in writing, for an exact loan amount that the borrower qualifies for based on that lender's program guidelines. Most pre-approval letters are valid for 60 to 120 days from the date of issuance. Having this letter is a major difference of why a borrower should want to be pre-approved; agents and sellers view a pre-approval letter as a more firm start to the home-buying process. But more on that in a bit...
Unlike a mortgage pre-qualification which typically is no-cost to the borrower, a pre-approval might carry a couple of costs. One such fee, charged by most major banks and some mortgage lenders is a lender application fee. I've seen this fee range anywhere from $75 up to more than $600+ and most application fees are nonrefundable- even if the lender decides to not offer credit to the individual applying for a loan! (It is in my opinion, that charging an application fee, even if a borrower doesn't get or qualify for a loan, is just downright unfair- so we do NOT charge any application fees at our office). Another very common fee, is a 3rd-party credit-bureau fee. This fee, usually in the neighborhood of $30, is collected on behalf of the lender to cover the costs of pulling the borrower's credit from each of the three major credit bureaus (TransUnion, Experian & Equifax).
Work with a Lender BEFORE finding a Realtor
If you are new home buyer, or just haven't purchased a home recently, start working with a Mortgage Lender first, before looking at homes with a Realtor. Your mortgage lender will be the person who will help determine your eligibility and home affordability- that way you know exactly what you can afford to buy, when it comes time to shop for a home.
Reasons why a Borrower Should Consider Pre-Approval over Pre-Qualification
There’s no harm in getting pre-qualified – it’s a good introductory start to buying a home and finding out what you might qualify for. But to lock down a home, a borrower should focus on getting pre-approved with a lender instead.
There are several other reasons why a borrower should want to be pre-approved, as well. First, and probably the most important reason: they will have an accurate idea of how much home they can afford. This will allow your Realtor and you, to find homes that are at or below your pre-approved amount. This enables you to move quickly when you find the perfect place, and not waste time guessing or looking at properties that are beyond your means.
Second, a pre-approval letter can make you stand out in a competitive real estate market by proving to real estate agents that you are a credible buyer. They know you'll be able to act fast, as your lender is that much closer to finalizing the loan with an underwriter. Some sellers might even require buyers to submit a pre-approval letter with the offers, although having a pre-approval letter does not guarantee that your offer will be accepted by a seller.
Third, a pre-approval letter tells the seller and their representative's that you're offer is serious, and that you are ready for the final financing arrangements with your lender. This will make your offer stand out from any other competing offers from buyers who haven't already gotten their financing pre-arranged or who are merely pre-qualified with a lender.
Does a Pre-Approval Guarantee a Loan?
Unfortunately, no. Even if you receive a pre-approval letter from a lender, it is still not a for sure thing- nor are you guaranteed a specific rate or loan term. Regardless of a pre-approval being issued, a lender may still require additional income, asset verifications, as well as the successful satisfaction of other conditions from the underwriter- all before extending you a loan. Pre-approval letters are also subject to modification or cancellation should a borrower's financial situation suddenly change.
I always recommend to my borrowers that they should seek out a pre-approval for a home loan as their first step- even before contacting a Realtor.
Not only does a pre-approval help you and your Realtor with price and negotiations, but the pre-approval process also can address many potential problems that can sneak-up before the loan's closing. With so many people involved in a real-estate transaction: Buyers, Sellers, Realtors, Title, Escrow, Lenders, Underwriters, Funders, and even Attorneys- there's a lot of moving parts that your lender must deal with. But being pre-approved can help diminish many borrower related issues, as many of the problems can be addressed early on- rather than causing undue stress towards the end. Do that, and you've taken a huge step in successfully enjoying the process of buying the home of your dreams!
I'm very fortunate to have helped so many first-time homebuyers navigate today's complicated home buying process. I've also been able to help countless others who have been turned away when other banks or lenders said, "No." Regardless, if you are considering Sierra Pacific Mortgage as your next mortgage lender, I urge you to review our teams past client reviews and testimonials, and you'll see just how dedicated we are to helping our clients succeed.
If you would like to know more about becoming Pre-Approved, Pre-Qualified, or the Mortgage Loan Products available, I'm happy to help!
Branch Manager & Residential Mortgage Loan Originator
2580 St. Rose Pkwy., Suite #230
Henderson, NV 89074
Office: (702) 420-2250
Fax: (855) 689-6691
Some products and services may not be available in all states. Programs, rates, terms, and conditions are subject to change without notice. Subject to verification of borrower qualifications, property evaluations and credit approval. Terms and conditions apply. This is not a commitment to lend and not all borrowers will qualify. Sierra Pacific Mortgage Company, Inc. may not be the lender for all products offered. Some loans may be made by a lender with whom Sierra Pacific Mortgage has a business relationship. Sierra Pacific Mortgage Company, Inc. NMLS #1788. Nevada Commissioner of Mortgage License #3268. Additional license info available at: www.nmlsconsumeraccess.org. Equal Housing Lender.